A line of credit is an agreement between a bank or a financial institution and another entity such as an individual or a business that allows the entity to borrow money up to an established amount as needed. Secured lines of credit require the business to put up collateral, or assets, to help guarantee any loans taken out against the line of credit. Companies with an unsecured business line of credit are not required to put up any assets because the financial institution considers the line of credit to be a good risk. The main advantage of getting an unsecured line of credit is that the business owner will not have to risk any assets in order to get the line of credit and will still have all of the advantages that are associated with having a line of credit. There are two main disadvantages of getting an unsecured business line of credit — that the financial institution will be unwilling to extent a sufficient line of credit to meet the company's needs and that the financial institution may charge a higher rate of interest than the institution would for a secured line of credit.
An unsecured business line of credit allows a business owner to borrow money, or not, at the owner sees fit. The concept of a line of credit is similar to that of a credit card. A business owner only has to make payments and pay interest on the money that the owner has withdrawn from the line of credit, regardless of the maximum available amount. Business owners typically use their line of credit to finance short-term projects rather than to fund purchasing property and equipment.
Banks and financial institutions will not automatically give business owners an unsecured business credit line. The company that is applying for the unsecured business line of credit has to have a high credit rating, which can take years to build. Even if a business has a qualifying credit rating, a financial institution is likely to try to hedge its bets. This means that the institution may not extend as high a limit on an unsecured line of credit as it would if the line of credit was secured. In addition, the financial institution may charge higher interest rates to further protect its investment.
There is not one answer as to whether a company should take out a secured versus an unsecured business line of credit. The business should explore both possibilities, taking into consideration the type of product or service the company offers and what the marketplace is like and the competition is like. In addition, the business should take into account any additional costs that a financial institution may require for taking out an unsecured line of credit.